By Brian Harper:
Homeaway (AWAY) is a decent business with positive network effects and historically strong revenue growth. However, internal growth has recently slowed significantly, past growth is partially obscured by acquisitions, and the stock is selling at about 60x 2011 expected earnings and 8x revenue. Given the limited potential market size and nosebleed valuation, we think shares have significant downside, and upside risk is limited.
Homeaway’s primary business is the VRBO site which allows residential property owners to rent their properties on a short-term basis to vacationers or others. Homeaway charges an annual listing fee to the property owner, which starts at base levels of a few hundred dollars and increases for extra photos, features and prominence in searches. VRBO requires a minimum one year commitment and receives the cash up front. They then amortize the revenue over a one year period through the income statement. This is an important point and